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					       An Analysis of the Malawi Economy
                               1994-2003




M. R. M. Hajat
P. O. Box E14,
Post Dot Net
Chichiri
Blantyre -3
Tel/Fax: +265 01 674 964
Email: ipi@africa-online.net
Background
With a nominal per capita income of $160, Malawi is one of the poorest countries in the
world, with dire poverty that is pervasive and deeply rooted. Thirty percent of the population
earn incomes that are inadequate to assure basic caloric needs. Life expectancy is at an
average of 44 years.
This daunting scenario is further compounded by one of the highest prevalences of HIV/AIDS;
in urban areas, the prevalence rate among women visiting prenatal clinics is estimated at
over 30 percent. Water and sanitation and rural infrastructure are severely inadequate: over
two-thirds of households use pit latrines, and potable water is available to only half the
population. Prospects for any material dent in the depth and breadth of poverty are limited
as long as population continues to grow at the high rate of 2.7 percent a year, whilst
economic growth declines year upon year.
Malawi's location and geography also pose daunting challenges to growth and
development. It is a relatively small country (48,000 square miles), landlocked (with the
attendant implications of high transport costs), lacks mineral resources, and is among the
most densely populated in Sub-Saharan Africa. The pressure of people on land has resulted
in serious environmental degradation, which is threatening livelihoods, water supply, and
hydro-electricity generation. Malawi is highly vulnerable to periodic drought; it has recently
suffered three droughts in four years. The economy is mainly agrarian, with 40 percent of GDP
produced by, and 85 percent of the labour force employed within an agriculture sector
focused on maize and burley tobacco.
Economic policies in the three decades following independence fostered a dualistic
economy with a vertically integrated and inter-locking pattern of ownership by an elite strata
– at the expense of the masses. A handful of public and private corporations, and banks
dominated the economy. Similarly, the agriculture sector comprised of a few thousand
commercially oriented estates, which paid only nominal rent for their lease holdings, and a
smallholder sector with nearly 2 million household farmers based mainly on subsistence maize
production.
Nevertheless, Malawi enjoyed successful management during the decade following
independence. This was largely as a result of investments in estate agriculture and
infrastructure, conservative macroeconomic policies, and a disciplined parastatal sector.
The economy experienced healthy growth in the first years of independence, with per
capita income increasing between 1966 and 1980 at an average annual 3 percent. But in
the late 1970s the confluence of favourable factors that supported the growth of the
economy ended. Over the following 15 years, Malawi suffered from economic shocks in the
form of periodic drought, increases in oil prices and the cost of international borrowing,
decreases in tobacco prices, and civil war in its neighbouring country, Mozambique, which
disrupted its main transport route.
To cope with the resulting imbalances, the government embarked on a series of adjustment
programs that continue to the present, supported by the IMF and World Bank. Success in
stabilizing the economy led to two periods of recovery in 1982-85 and 1987-91, interspersed
by periods of instability and fiscal crisis. The second period of growth (1987-91) was aborted
when huge shocks confronted the economy between 1992 and 1994. Major droughts in 1992
and 1994, and falling tobacco prices led to losses of more than 25 percent of GDP. These
shocks were compounded by a disruption in external assistance for 18 months over 1992-94
as donors expressed displeasure over poor governance. Finally, in 1994, a full blown
macroeconomic crisis developed in the face of drought, runaway government expenditures
in the months preceding the election, steep depreciation in the exchange rate and a
deterioration in public revenue and expenditure management.



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In 1995, Malawi recovered from the large shocks caused by price movements and droughts
of the last few years. There were important successes in stabilizing the economy from the
large fiscal deficit, expenditures, and monetary expansion of previous years. GDP recovered
by 10 percent, led by the recovery of smallholder production and good growth in the
transport and distribution sectors. Investment savings also recovered considerably, mainly
stimulated by major cuts in government expenditure. There were important successes in
stabilizing the economy from the large fiscal deficit, expenditures, and monetary expansion
of previous years. The cash budgeting system for the government proved more effective in
controlling expenditures. Revenue collection met budget targets. Consequently, the fiscal
deficit for fiscal 1996 (after grants) was about 5 percent of GDP, compared to 15 percent in
the previous year.
However this proved to be short lived as the economy has declined steeply since then.
Malawi suffered an extreme drought in 2002 and had to import over 200 thousand tonnes for
maize to avoid mass starvation. However even this issue proved controversial:
Government subsidised private traders
Stories around the causes of famine in Malawi are making new turns. The Minister of Finance and Economic
Planning, Hon Friday Jumbe, has said that Government of Malawi subsidised prices of maize to private traders
by over MK I billion, but failed to protect the poor Malawians from the thieving prices of the private traders.
The National Food Reserve Agency (NFRA) had bought maize at MK 7.80 kg in 1999 but sold the same to
private traders and Admarc at prices ranging from MK 3/kg - MK 6/kg. The private traders, exercising their free
marketing right, sold the maize to starving poor Malawians at prices ranging from Mk 17 - MK42 / kg.
Government and most International Financing Institutions refused to subsidise the prices to the local Malawians,
because "it is simply a question of demand and supply" and that "Malawi is a free trade area". Later,
government ordered that only ADMARC should sell the maize but at a price of K17/kg.
                                                                           Malawi Economic Justice Network
Numerous IMF delegations have highlighted serious non-compliance with conditionalities
and have thus far, declined to enter into any new agreements until the anomalies have
been corrected. This has resulted in little or no Donor Budgetary Support for the last 18
months, thereby forcing the Government to borrow heavily from the domestic financial
markets (MK40 billion as at January 2003), which in turn has hiked up interest rates to a level
(44%) where local firms can no longer survive. Over 40 firms/industries have closed down or
relocated to other countries during the past 12 months. Government expenditure shows no
sign of reducing and the budget deficit continues to deepen.
The experience of fiscal year 2001/2002 makes the probability of this year's budget deliverance smaller. Last
year, the IMF withheld over MK 3.5 billion (US $47 million) of its PRGF funds after Malawi got 'off-track' its
economic management commitments. In the same year, DFID, a bilateral donor, withheld over MK900 million
(US $12.5 million). We also saw DANIDA pack up its boots. This left government in a very tight corner. One
thing was sure anyway, that from the 'mistakes' of a few, the whole nation was punished.
The situation has not changed much this year. Information from the Ministry of Finance and Economic Planning
shows that at the moment government is relying solely on domestic collections because no donor has come yet
to support the budget 2002/2003. It is hoped, prayed for, and wished that donor support would come in
December 2002 after the IMF board reviews Malawi's performance and compliance to the IMF Poverty
Reduction Growth Facility (PRGF) that Malawi signed in December 2000. Unfortunately, most bilateral donors
to Malawi would resume their support only if the IMF boards recommended resumption of the PRFG. Domestic
revenue in Malawi amounts only to about half the total budget.
                                                                           Malawi Economic Justice Network
The much vaunted Land Reform Policy has now been adopted as a blueprint by
Government, despite serious concerns raised by various sectors. The main concerns are on
inclusivity, constitutionality, ownership, compatibility and equitability however these have not
elicited any responsiveness from the relevant Ministry. The perceived obduracy has further

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shaken investor confidence and caused a hiatus in new construction and other ventures that
would depend on security of tenure. The Law Commission has invited submissions from the
public, prior to drafting new Land legislation that would comply with the framework laid out
in the new Land Policy, and consultations are expected to commence sometime in 2003.
The Privatisation Program has also generated much controversy and debate, due to public
perceptions of opacity and “insider trading”. It is commonly believed that “National Assets”
are being disposed off at giveaway prices to profit-driven private entrepreneurs – usually
foreign firms because of the lack of financial capacity in local investors, with little or no
benefit accruing to the people of Malawi who are, in theory, the ultimate owners of these
assets. Indeed, in some cases, these parastatals (such as ADMARC) performed a social
safety net function in the absence of a governmental structure, for the poorest sections of
Malawian society and it is feared that privatisation of these enterprises would, inevitably lead
to the cessation of vital support systems that sustain people who live in dire poverty. The
following excerpt from an article published by the Malawi Economic Justice Network (MEJN)
highlights the quandary facing the nation:

The Benefits(?) From Privatisation in Malawi
One of the concerns often raised by workers in the parastatals under privatisation is that of loss of jobs and poor
welfare of the remaining staff. Most circles of the civil society see privatisation as process where government
refuses its responsibility of providing for the basic needs of the people and referring the community to the mercy
of profit-oriented private traders. Some critics also see privatisation as a deliberate loss of assets by government
since often times the companies are sold at a loss. In Malawi, all these issues are testing themselves in the
privatisation process.
From the sale of 42 companies, government raised an amount of MK 1.67 billion (about US $ 20 million). The
proceeds from the privatisation are not used for viable investment either. From the sale of the above companies,
some money is used to run the Privatisation Commission, restructuring/making the other prospective parastatals
'viable for privatisation,' support payments for retrenchment/redundancies and in funding 'any project within the
government development plans'
The privatisation process itself also costs jobs! For example, 322 jobs were lost at Malawi Railways Ltd, 220 at
Portland Cement, 130 jobs lost at Malawi Book Service, 45 jobs at the Government Hostel and 25 at Malawi
Daily Industries just to mention a few.
This Privatisation behaviour has however been opposed by civil society. The latest case is that of ADMARC.
According to figures from the Parliamentary Committee on Agriculture that was conducting hearings on the
views of Malawians on whether or not to privatise Admarc, all of the 36 respondents were against ADMARC
privatisation. We hope that the findings of the committee will add to the cries of the poor and government and
pressurizing donors not to privatise the dear ADMARC but put proper management in place.
Since the establishment of the Privatisation Commission of Malawi, 42 parastatals have been privatised.
Government has sworn to privatise 28 more companies.
The following table enlists the number of privatised firms – past, present and future:

Companies Privatised                     Parastatals under privatisation now         Parastatals planned To Go

1. Auction Holdings                      1. David Whitehead & Sons                   1. ADMARC
2. Central Tobacco Properties            2. ESCOM                                    2. Bata Shoe company
3. Chemicals and Marketing Ltd           3. Leopard Match Co                         3. Shire Bus Lines
4. Chillington Agrimal                   4. Malawi Catering Services                 4. Blantyre Water Board
5. Commercial Bank of Malawi             5. Malawi Finance Co                        5. Lilongwe Water Board
6. National Bank of Malawi               6. Malawi Rural Finance Co                  6. Dzalanyama Ranch
7. Malawi Daily Industries               7. Malawi Tea Factory Co                    7. Malawi Development
8. Malawi Lake Services                  8. Smallholder Coffee Authority             Corporation
9. Malawi Railways Ltd                   9. Smallholder Tea Authority                8. Malawi Housing
10. National Insurance Company           10. Kasungu Flue Cured Authority            Corporation


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11. New Building Society               11. Lifidzi Farm                         9. Lilongwe International
12. Optichem Malawi Ltd                12. Meru Ranch                           Airport
13. Import and Export                  13. MPICO Ltd                            10. Government Press
14. Portland Cement                                                             11. Indefund
15. Smallholder Sugar Authority                                                 12. Mzuzu Smallholder
16. SUCOMA                                                                      Poultry Project
17. Dwangwa Sugar Company                                                       13. Plastic Products Ltd
18. Malawi Book Service                                                         14. Stockbrokers Malawi
19. Packaging Industries                                                        Ltd
20. Government Hostel                                                           15. Sunbird Tourism
21. Encor Products Ltd
22. Finance Corporation Ltd
23. Kaombe Farm
24. Kasungu Inn
25. Ngabu Inn
26. Kuti Ranch
27. Likhubula Lodge
28. Chigumukire Lodge
29. Kachere Lodge
30. Ntchisi Lodge
31. Mangochi Lodge
32. Limbe Rest House
33. Blantyre Rest House
34. Viply Ltd
35. Vipcor
36. Zomba Trout Farm
37. Brick & Tile Company
38. Chiphazi Farm
39. Choma Ranch
40. Mchenga Coal Mine
41. Mining & Investment
Development Corporation
42. Mpwepwe Boatyard Company

                                         Usage                                                   MK
                                                                                               (Million)
Funding the Privatisation Commission                                                                  135.7
Restructuring public enterprises ready for privatisation                                               67.3
Retrenchment costs & settlement of debt                                                                 200
Construction of 8 Day Secondary Schools (Kagulama, Jalasi, Walemera, Madzanja,                        257.7
Nansomba, Chingale, Mpira & Wenya Day Sec Schools)
Road maintenance                                                                                        83.9
Purchase of Dawa House (government house)                                                               15.5
Privatisation Special fund                                                                              21.5
Boreholes                                                                                               57.3
Youth Credit Scheme                                                                                       34
Retained by ADMARC and MDC                                                                            818.54
       As at 30th June 2001, there was a balance of MK133 million in the privatisation revenue account
     (Sources: MEJN, Ministry of Finance and Economic Planning and the Privatisation Commission).




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The following table illustrates Malawi’s economic meander from 1997 to 2002
 Malawi Data Profile
                                                     1997          2000           2001
People
Population, total                                    9.7 million   10.3 million   10.5 million
Population growth (annual %)                         2.2           2.1            2.0
National poverty rate (% of population)              ..            ..             ..
Life expectancy (years)                              40.7          38.8           38.2
Fertility rate (births per woman)                    6.4           6.3            6.2
Infant mortality rate (per 1,000 live births)        126.6         117.0          114.0
Under 5 mortality rate (per 1,000 children)          ..            188.0          183.0
Births attended by skilled health staff (% of total) ..            55.6           ..
Child malnutrition, weight for age (% of under 5) ..               25.0           ..
Child immunization, measles (% of under 12 mos) 87.0               83.0           82.0
Prevalence of HIV (female, % ages 15-24)             ..            ..             14.9
Illiteracy total (% age 15 and above)                42.4          39.9           39.0
Illiteracy female (% of age 15 and above)            56.7          53.5           52.4
Primary completion rate, total (% age group)         ..            ..             ..
Primary completion rate, female (% age group)        ..            ..             ..
Net primary enrolment (% relevant age group)         ..            100.6          ..
Net secondary enrolment (% relevant age group) ..                  24.9           ..
Environment
Surface area (sq. km)                                118.5 thou    118.5 thou     118.5 thou
Forests (1,000 sq. km)                               ..            26,010.0       ..
Deforestation (average annual % 1990-2000)           ..            2.4            ..
Water use (% of total resources)                     ..            1,668.0        ..
CO2 emissions (metric tons per capita)               0.1           ..             ..
Access to improved water source (% of total
                                                     ..            57.0           ..
pop.)
Access to improved sanitation (% of urban pop.) ..                 96.0           ..
Economy
GNI, Atlas method (current US$)                      2.1 billion   1.7 billion    1.7 billion
GNI per capita, Atlas method (current US$)           220.0         170.0          160.0
GDP (current $)                                      2.5 billion   1.7 billion    1.7 billion
GDP growth (annual %)                                3.8           1.7            -1.5
GDP implicit price deflator (annual % growth)        7.8           25.2           26.1
Value added in agriculture (% of GDP)                33.7          36.5           34.0
Value added in industry (% of GDP)                   18.8          17.4           17.9
Value added in services (% of GDP)                   47.5          46.0           48.1
Exports of goods and services (% of GDP)             22.5          26.4           26.0
Imports of goods and services (% of GDP)             35.3          38.5           38.0
Gross capital formation (% of GDP)                   12.2          12.5           10.9
Current revenue, excluding grants (% of GDP)         ..            ..             ..
Overall budget balance, including grants (% of
                                                     ..            ..             ..
GDP)
Technology and infrastructure

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Fixed lines and mobile telephones (per 1,000
                                                    4.4            9.1            10.6
people)
Telephone average cost of local call (US$ per
                                                    0.0            0.0            0.0
three minutes)
Personal computers (per 1,000 people)               ..             1.2            1.3
Internet users                                      500.0          15,000.0       20,000.0
Paved roads (% of total)                            19.0           ..             ..
Aircraft departures                                 3,600.0        4,800.0        4,700.0
Trade and finance
Trade in goods as a share of GDP (%)                52.0           54.1           49.2
Trade in goods as a share of goods GDP (%)          90.6           93.5           87.6
High-technology exports (% of manufactured
                                                    ..             ..             ..
exports)
Net barter terms of trade (1995=100)                111.5          94.0           ..
Foreign direct investment, net inflows in reporting
                                                    22.1 million   45.0 million   58.4 million
country (current US$)
Present value of debt (current US$)                 0.0            1.5 billion    1.5 billion
Total debt service (% of exports of goods and
                                                    13.6           11.7           7.8
services)
Short-term debt outstanding (current US$)           23.5 million   78.4 million   46.2 million
Aid per capita (current US$)                        35.6           43.3           38.1
Source: World Development Indicators database, April 2003


All the above factors point to a pressing need for urgent positive remedial measures to be
applied to curb Malawi’s seemingly inexorable economic decline. This can only be
accomplished with public co-operation and support that can only be engendered by
inclusivity and transparency within the process. Unless the imbalances are rapidly corrected,
the continued economic decline will inflict ever increasing hardship upon the already
suffering masses, and this, in turn, would impact negatively upon the inculcation,
consolidation, and evolution of Democracy in Malawi.




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